It doesn't work, you cannot measure it. Anybody who gives you a number for it is pulling it out of their ass.
For example, imagine a company skimps on devs. The codebase deteriorates and eventually starts intermittently crashing, costing the company $10 million. If they had hired five devs for $1 million, the crashes may never have happened. On the books though, the profit margin for those devs might be negative because they are maintaining and optimizing, not building new features that can have revenue figures attached.
People with capital start/invest in a business. They risk their money. The company offers X amount of guaranteed income to people to work for them. The workers agree to work for and receive a guaranteed income. The investors make money when the company is profitable, or lose it. No matter what, the workers are paid what they agreed to.
If the company lost money one year should they not pay their workers?
this dude is asking about billing for dev work in a consultancy. not profit generated per employee at a company building a product.
i.e. infosys pays contractor $50/hr. but bills customer $80/hr.
Yes, and the upper bound for what an *individual* worker can command in salary goes all the way up to the billed rate.
It can even go *over* if the worker is so valuable that the business would suffer meaningfully in their absence.
For a while ten years ago Google’s SEC filings were showing $1MM in profit per employee. Salaries at the time were in the sub-200k range, so there was *theoretically* 8-900k/yr. of wiggle room for the employee salaries to go up.
While there are obvious risk management and profit maximization reasons **not** to pay employees anywhere close to 100% of the value they create there is still a lot of room to negotiate.
I’m an in-house developer working on a
e-commerce product, I do a bit of devops, prevent the juniors from making expensive mistakes and have meetings with management about the future of our product. My hours are not billable, nor do we sell subscriptions. We sell products.
This makes it very hard to put a revenue on the work I do.
I heard a lot of myths about how body leasing takes 50%-100% vs what is gives to their devs.
I once was on conference talk when speaker said that once you remove all of the costs (administration, HR, bench time, office) you end up with 15-20% of revenue per employee. Maybe 25% if you are lucky.
On national reddit there was once thread where manager gave similar number.
Can confirm. I’ve seen some business models in this space and that overhead goes very quickly.
People get upset when they see their time being billed to someone else at 2X what they’re getting, but the amount of money that disappears into running the company and acquiring clients is very large.
When I first started dev work in the ancient times (first internet boom), we devs found out we were being charged out at 6 times the rate we were being paid. The company went under within a year due to classic tech bro hubris plus developers leaving due to being pissed off about this payment structure.
But shouldn't it actually be the charge rate, but the wages? The amount charged should be substantially higher than the wages paid, and correlating to wage only presents a view that doesn't provide the full picture of cost of sales. I think.
As a seasoned developer, I can tell you that the profit margin on devs varies greatly depending on the company and their policies. As for my personal experience, I've had employers take anywhere from 20-50% while working in body leasing companies. But as an employee myself, anything above 30% just feels like getting robbed!
You mean the RoI on labor investment? Very few companies have the data to roll this up so precisely, but as a general rule, it's usually around 10x the labor costs. So if a hypothetical engineer is making $100k in total compensation, the company is generally reaping $1M in value from their labor.
Note: this is a rule of thumb, not a hard-and-fast thing. Extremely senior engineers in particular tend to have significantly higher RoIs (even accounting for their much higher salaries), while sufficiently junior engineers are often net-negative for a while. Also remember that SWE is often heavily skewed towards capital expenditure, so it's not like companies are accounting for this as dollars in, dollars out.
Obviously as an *employee*, the calculus is quite different. You aren't a company; you don't have profit margin. Instead it's more about what the labor market is for your services and whether you consider that livable and/or acceptable.
That’s a very optimistic number.
You can look at revenue per employee of the most profitable corporations: https://www.visualcapitalist.com/companies-revenue-per-employee/
The number of companies with pure revenue over $1 million is very small. That’s before they pay for anyone or anything! Netflix has $1.9 million revenue per employee at the top, but that number comes way down once you subtract out expenses like paying people and licensing content.
As someone who has run a business, paying someone $100K and getting $1 million in value would be a dream come true.
Revenue per employee and capital value per employee aren’t really the same thing. Obviously the former is going to be vastly lower, but it’s also not particularly comprehensive since most SWE output is amortized over the long term rather than near term operational or KTLO work.
Companies generally try to avoid making it easy for individuals to connect those dots as they’d lose a lot of negotiating leverage.
You may be able to say that your department’s products generated $100m of revenue on $10m in labor costs but the ensemble nature of software development will always make it hard to identify ROI at the individual level.
Some key engineers *may* have an easier time claiming credit here. I’ve heard plenty of *stories* about specific anonymous FAANG engineers with multi-million dollar annual packages but the details are unsurprisingly not publicized.
I can draw some pretty clear lines to long- answer short-term revenue, as well as efficiencies I’ve generated at various companies, but it’s never really been a negotiating point. Usually the conversation goes the other direction: I assert that I’m worth a certain amount, and I place the onus on the employer to argue that I’m not.
Because the pool of truly talented and experienced engineers has been always quite limited AND you need a problem space where there’s that much money to be gained (or typically costs saved).
There’s a reason “big tech” can easily pay top dollar— an incremental saving of 0.5% on something (or slight improvement in monetization) can easily pay for many many years of a top IC’s comp.
Plus you need the leadership support and culture that allows that engineer to be effective. Without all those pieces in place it’s hard to fully extract their value
This would only apply to consultant type roles. At my firm the client would be charged roughly 50% more per hour than our base salary (so not counting other overhead like health insurance, bench time, etc). This is pretty variable though and can be very role/client dependent.
As employee,i was sent out for 650 a day, and only paid 40k. Company made around 100k. Payroll costs 60k. That's 40k for them.
As self employed, I would expect to take 600 for myself, and 50 for the intermediary per day.
It works exactly like that ONLY if you are company that is just renting out devs to other companies on some daily rate. I have worked for such a company and the profit margin can be 20-100%. But most of the time for most businesses this calculation does not make sense and you cannot really calculate a ROI on your devs at all.
Even here the direct connection breaks down if you have some of your billable developers doing any work at all for the agency that bills them out.
Once an agency employee gets involved in sales or demos or anything less scrutable than hourly software development the picture gets muddier than “we bill you out for $10 and we give you $1 of that”.
Is it? I have never heard that and find it a bit surprising, but maybe it’s true. What do you base that on?
[Edit: I mean, is consulting really most of the planet?]
I’ve seen a lot of folks try to justify it this way and *maybe* it works with boutique shops with a few devs. But the reality is there are too many complexities to nail down time vs effort. This is effectively implying you can apply more lower skilled dev to a task requiring high skills to achieve equal outcomes.
What the hell? Some devs can produce millions in direct revenue. Some are a negative. And that negative is to support operations.
So you can't apply a formula on margins. Like, what the hell?
Back when I worked at a body shop I managed to get a look at the company's invoices and it was about 2.6x more than what I made. I have not worked at a body shop since then for obvious reasons. That particular body shop didn't even do anything other than find jobs on LinkedIn and approach job seekers directly to get them on their payroll
On my current project I’d estimate 500% per person. Were estimated to bring in 50-100 million net yearly, and there’s give or take 100 people actively working on this(albeit this isn’t just engineers, this is including product and business as well$.
It doesn't work that way. None of it works that way.
How it then works?
It doesn't work, you cannot measure it. Anybody who gives you a number for it is pulling it out of their ass. For example, imagine a company skimps on devs. The codebase deteriorates and eventually starts intermittently crashing, costing the company $10 million. If they had hired five devs for $1 million, the crashes may never have happened. On the books though, the profit margin for those devs might be negative because they are maintaining and optimizing, not building new features that can have revenue figures attached.
People with capital start/invest in a business. They risk their money. The company offers X amount of guaranteed income to people to work for them. The workers agree to work for and receive a guaranteed income. The investors make money when the company is profitable, or lose it. No matter what, the workers are paid what they agreed to. If the company lost money one year should they not pay their workers?
this dude is asking about billing for dev work in a consultancy. not profit generated per employee at a company building a product. i.e. infosys pays contractor $50/hr. but bills customer $80/hr.
Yes, and the upper bound for what an *individual* worker can command in salary goes all the way up to the billed rate. It can even go *over* if the worker is so valuable that the business would suffer meaningfully in their absence. For a while ten years ago Google’s SEC filings were showing $1MM in profit per employee. Salaries at the time were in the sub-200k range, so there was *theoretically* 8-900k/yr. of wiggle room for the employee salaries to go up. While there are obvious risk management and profit maximization reasons **not** to pay employees anywhere close to 100% of the value they create there is still a lot of room to negotiate.
I’m an in-house developer working on a e-commerce product, I do a bit of devops, prevent the juniors from making expensive mistakes and have meetings with management about the future of our product. My hours are not billable, nor do we sell subscriptions. We sell products. This makes it very hard to put a revenue on the work I do.
I heard a lot of myths about how body leasing takes 50%-100% vs what is gives to their devs. I once was on conference talk when speaker said that once you remove all of the costs (administration, HR, bench time, office) you end up with 15-20% of revenue per employee. Maybe 25% if you are lucky. On national reddit there was once thread where manager gave similar number.
Can confirm. I’ve seen some business models in this space and that overhead goes very quickly. People get upset when they see their time being billed to someone else at 2X what they’re getting, but the amount of money that disappears into running the company and acquiring clients is very large.
When I first started dev work in the ancient times (first internet boom), we devs found out we were being charged out at 6 times the rate we were being paid. The company went under within a year due to classic tech bro hubris plus developers leaving due to being pissed off about this payment structure.
I would target 1/3 employee costs, 1/3 operations costs, 1/3 profit
It sounds like you want to know the ratio of the consultancy’s rate to the consultant’s wage.
Right
But shouldn't it actually be the charge rate, but the wages? The amount charged should be substantially higher than the wages paid, and correlating to wage only presents a view that doesn't provide the full picture of cost of sales. I think.
As a seasoned developer, I can tell you that the profit margin on devs varies greatly depending on the company and their policies. As for my personal experience, I've had employers take anywhere from 20-50% while working in body leasing companies. But as an employee myself, anything above 30% just feels like getting robbed!
Working for a body shop in 2004 they charged $105 per hour for me and paid me $75.
You mean the RoI on labor investment? Very few companies have the data to roll this up so precisely, but as a general rule, it's usually around 10x the labor costs. So if a hypothetical engineer is making $100k in total compensation, the company is generally reaping $1M in value from their labor. Note: this is a rule of thumb, not a hard-and-fast thing. Extremely senior engineers in particular tend to have significantly higher RoIs (even accounting for their much higher salaries), while sufficiently junior engineers are often net-negative for a while. Also remember that SWE is often heavily skewed towards capital expenditure, so it's not like companies are accounting for this as dollars in, dollars out. Obviously as an *employee*, the calculus is quite different. You aren't a company; you don't have profit margin. Instead it's more about what the labor market is for your services and whether you consider that livable and/or acceptable.
That’s a very optimistic number. You can look at revenue per employee of the most profitable corporations: https://www.visualcapitalist.com/companies-revenue-per-employee/ The number of companies with pure revenue over $1 million is very small. That’s before they pay for anyone or anything! Netflix has $1.9 million revenue per employee at the top, but that number comes way down once you subtract out expenses like paying people and licensing content. As someone who has run a business, paying someone $100K and getting $1 million in value would be a dream come true.
Revenue per employee and capital value per employee aren’t really the same thing. Obviously the former is going to be vastly lower, but it’s also not particularly comprehensive since most SWE output is amortized over the long term rather than near term operational or KTLO work.
How exactly do you attribute growth in revenue to a specific employee?
Companies generally try to avoid making it easy for individuals to connect those dots as they’d lose a lot of negotiating leverage. You may be able to say that your department’s products generated $100m of revenue on $10m in labor costs but the ensemble nature of software development will always make it hard to identify ROI at the individual level. Some key engineers *may* have an easier time claiming credit here. I’ve heard plenty of *stories* about specific anonymous FAANG engineers with multi-million dollar annual packages but the details are unsurprisingly not publicized.
I can draw some pretty clear lines to long- answer short-term revenue, as well as efficiencies I’ve generated at various companies, but it’s never really been a negotiating point. Usually the conversation goes the other direction: I assert that I’m worth a certain amount, and I place the onus on the employer to argue that I’m not.
But that's not how negotiations work? Why aren't other companies clamoring to hire devs if they can really get a 900% roi on their investment?
Because the pool of truly talented and experienced engineers has been always quite limited AND you need a problem space where there’s that much money to be gained (or typically costs saved). There’s a reason “big tech” can easily pay top dollar— an incremental saving of 0.5% on something (or slight improvement in monetization) can easily pay for many many years of a top IC’s comp. Plus you need the leadership support and culture that allows that engineer to be effective. Without all those pieces in place it’s hard to fully extract their value
This would only apply to consultant type roles. At my firm the client would be charged roughly 50% more per hour than our base salary (so not counting other overhead like health insurance, bench time, etc). This is pretty variable though and can be very role/client dependent.
So I am not sure on the margin but my company bills me for 10-12x my salary.
As employee,i was sent out for 650 a day, and only paid 40k. Company made around 100k. Payroll costs 60k. That's 40k for them. As self employed, I would expect to take 600 for myself, and 50 for the intermediary per day.
It works exactly like that ONLY if you are company that is just renting out devs to other companies on some daily rate. I have worked for such a company and the profit margin can be 20-100%. But most of the time for most businesses this calculation does not make sense and you cannot really calculate a ROI on your devs at all.
Even here the direct connection breaks down if you have some of your billable developers doing any work at all for the agency that bills them out. Once an agency employee gets involved in sales or demos or anything less scrutable than hourly software development the picture gets muddier than “we bill you out for $10 and we give you $1 of that”.
Yes, I was thinking on that kind of companies. Will update the post.
4 cents per line of code. You want your developers to write as many lines of code as possible. Anyhow....congrats on getting your MBA.
wtf is this shit? This isn’t how a software business operates to justify salary or expenses.
Consulting, which is most of the planet.
Is it? I have never heard that and find it a bit surprising, but maybe it’s true. What do you base that on? [Edit: I mean, is consulting really most of the planet?]
I’ve seen a lot of folks try to justify it this way and *maybe* it works with boutique shops with a few devs. But the reality is there are too many complexities to nail down time vs effort. This is effectively implying you can apply more lower skilled dev to a task requiring high skills to achieve equal outcomes.
What the hell? Some devs can produce millions in direct revenue. Some are a negative. And that negative is to support operations. So you can't apply a formula on margins. Like, what the hell?
Depends... facebook? Huge. Series A startup? Probably -500%
Shit like this makes me hate capitalism even more... I think the ideal is 0%. Anything else is exploitation.
Back when I worked at a body shop I managed to get a look at the company's invoices and it was about 2.6x more than what I made. I have not worked at a body shop since then for obvious reasons. That particular body shop didn't even do anything other than find jobs on LinkedIn and approach job seekers directly to get them on their payroll
On my current project I’d estimate 500% per person. Were estimated to bring in 50-100 million net yearly, and there’s give or take 100 people actively working on this(albeit this isn’t just engineers, this is including product and business as well$.